Statutory housing covenants

Issue Vol. 9 No. 3 January 2007 By Peter Farrow

Not quite 100 years ago, presumably to the chagrin of scriveners, someone had the idea of standardizing the essential elements of conveyancing by defining in the General Laws terms such as “warranty covenants” and “quitclaim covenants” for use in deeds, and “mortgage covenants,” “statutory condition” and “statutory power of sale” for mortgages. These statutorily defined terms became fundamental to Massachusetts conveyancing by their uniform, efficient, clear communication of central elements of the parties’ legal rights and obligations in a particular transaction.

Another property interest, the affordable housing restriction, is coming into ever- wider use as more communities adopt the Community Preservation Act. In addition, Chapter 40B developments continue to be a major engine for housing development; The ever-increasing demands being placed on land make it unlikely that the need for housing restricted for persons of modest income is a passing fancy. This article proposes that it is time to provide a similar statutory structure for affordable housing restrictions.

Under the sponsorship of Citizens Housing and Planning Association, some attorneys who practice in this area have drafted proposed new sections of General Laws, Chapter 183 to define the terms “statutory housing covenants,” “statutory housing conditions” and “statutory housing power to sell” for use in housing restrictions. To illustrate, in a structure mirroring the statutory condition for mortgages, the proposed “statutory housing condition” would require the owner to live in the house as principal residence, to pay all debt secured by the property, not to encumber the property beyond its affordable value and to convey the property only to another eligible household as their principal residence for an amount not exceeding the affordable (that is, restricted) value.

While it takes 248 words to say this with full legal precision in the proposed legislation, the job could be done in any housing restriction simply by using the phrase “statutory housing condition.” And just as a completely valid mortgage can be created using the statutory form set out in paragraph five of the appendix to Chapter 183, the legislation includes a statutory form for creating a complete and functional affordable housing restriction simply by saying that the grant is “with statutory housing covenants and on the statutory housing condition for any breach of which the holder shall have the statutory housing power to sell.” Twenty-five words doing the job of . . . well, we won’t go into that. The good news is that those 25 words will create and communicate efficiently uniform core legal rights for all housing restrictions in which they appear without standing in the way of other terms and conditions the parties wish to include. Here are some details.

The proposed “statutory housing covenants” mirror quitclaim covenants using a format similar to “mortgage covenants.” As noted above, the proposed “statutory housing condition” requires that the household owning the home live there as their principal residence, pay the debt secured by the home, not mortgage the home for more than its affordable value and sell the home at not more than the affordable value to another income-qualified household for use as their principal residence. The proposed “statutory housing power to sell” provides authority and structure, similar to the mortgagee’s power of sale, that will enable a holder of a housing restriction, when necessary, to preserve the restriction by transferring ownership and occupancy away from a breaching owner at the affordable value, with that owner having rights and remedies, including opportunity to cure, similar to those a mortgagor has in the case of alleged breach of the mortgage.

Essential terms such as “area median income” and “household income” are also defined, but the statute seeks to deal only in the essentials for the purpose of making the statutory structure universally applicable, leaving the parties in the transaction free to make their agreement on relevant terms and conditions. So, for example, the level of income that would qualify a household to own and live in the house is not defined, leaving this central issue to be tailored to the circumstances (not above 80 percent area median income in a 40B project but up to 100 percent area median income allowed under CPA). Universal application can be achieved only by distinguishing those elements that are in fact universal from those which, if imposed uniformly, would have the effect of limiting other useful choices. So the legislation is enabling, but not regulatory.

Specific provisions establish the long-term validity of the statutory housing covenant and facilitate creating a functional relationship with mortgagees. Under the legislation, a statutory housing restriction will satisfy the requirements of G.L. c 184, sec. 32 for continued enforceability without requiring DHCD approval (although any non-statutory elements of the restriction would need DHCD approval to achieve that status). The legislation also accommodates mortgagees, who face confusion from the myriad of restrictions resulting from local action, by providing that when the statutory housing structure is used in a restriction that is senior to the mortgage, the statutory components of the restriction will survive foreclosure but the non-statutory portion will be extinguished, allowing the mortgagee to resell the property subject only to the uniform statutory elements of the restriction. (The parties can alter this result by agreement.)

The statutory form, enabling a grant “with statutory housing covenants, on the statutory housing conditions and with the statutory housing power to sell,” will be equally effective if it is set out independently, for instance, in a deed or, more likely, as part of a separate affordable housing restriction. Just as one typically finds “mortgage covenants,” “statutory condition” and “statutory power of sale” appearing as centerpieces in widely varying mortgage documents because they ensure a valid mortgage while not standing in the way of the transaction being agreed by the parties, one assumes the dominant use of the statutory housing covenant, conditions and power to sell will be similar, and that they will most often appear in the text of a longer document as a foundation for the parties’ legal relationship as regards the property.

A mortgage which includes the statutory power of sale has the benefit of clearly established, functional remedies for breach and rights to cure set out in General Laws, Chapter 244, with foreclosure by public auction leading the list, entry typically acting like a statute of limitations against defects in the foreclosure sale, and court proceedings available when needed by either party. To meet a similar need in the event a statutory housing restriction is not being honored, the legislation includes a new Chapter 244A that creates such rights and remedies, largely incorporating relevant provisions of Chapter 244, resulting in a new set of remedial rights that will be familiar almost before one uses them for the first time. The major difference from the mortgage context is that transfer of a housing restriction as a remedy for the owner’s breach must occur at the affordable value, not at a discounted value, as typically occurs in mortgage foreclosure, and mortgagees who lent within the affordable value must be paid in full.

The task at hand for the community of real estate attorneys, along with others interested in affordable housing restrictions, is to review, discuss, modify if useful, and support the proposal now before the Legislature. The Massachusetts Bar Association can be an important forum for that discussion. If the bar does its job as well as those who created the existing statutory covenants nearly 100 years ago, the resources Massachusetts law offers to assist us in addressing fundamental and important needs of our clients will have been enriched.

The proposed legislation can be found at Senate Bill #754.